If you want to start a small farm, the Internal Revenue Service (IRS) offers several tax credits to help you reduce your liability. The deductions for farm owners are many of the same deductions available to other small business owners. Farmers are also allowed to deduct the cost of farm property in the year of purchase and 50 percent of prepaid farm supplies. Because of cyclical fluctuations in income, farmers are also allowed to average out their current income over the past three years.
As with all businesses, farm or non-farm, any expenses that concern the operation of the enterprise are deductible. This includes areas of the farmhouse used for business, farm equipment repair, maintenance and fuel expenses. Other deductible expenses include the cost and maintenance of animals, plus seed or materials needed to produce the finished farm product. The IRS generally defines business expenses as those that are accepted and appropriate for your trade or business.
Farm Property Deductions
Section 179 of the IRS code allows a business to fully deduct the cost of property in the year of purchase. The tax credit is limited to $500,000 and applicable to any property that falls under this category except for building structures used to furnish lodging. However, non-lodging commercial facilities like horticultural and livestock structures do qualify under this section.
Farmers often make income in one year as a result of efforts made over several years. Because of this elongated time frame, the IRS allows you to average out the income from a current year over the three previous years. This means you can allocate income for the year to a prior year where you declared a loss. However, this averaging is only available to farms that meet the IRS definition of a farmer, which includes anyone operating a nursery or sod farm, anyone raising or harvesting fruit-bearing trees or other crops, raising ornamental trees, raising of animals or one engaged in any fishing activity. If you lease land to a farming business but receive compensation in a share of the business, you may also take the income-averaging credit.
Prepaid Farm Supplies
You can deduct 50 percent of your prepaid farm supplies for feed, seed, fertilizer, small plants and poultry. However, this deductible is limited to 50 percent of your other deductible farm expenses. For example, if you bought $1,500 in feed, $500 in seed, and $4,000 in poultry, but your other deductible farm expenses amounted to $10,000, you can only take a $5,000 deduction for these expenses (half of your other deductible expenses).
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